As companies emerge from a rough stretch, theirshares can
quickly move back into favor with investors.
Trouble is, the rebounding share price can often overshoot the
mark and move intoovervalued territory, especially if there has
been a massiveshort squeeze in play. Here are three
fast-risingstocks that have rapidly moved from beingundervalued
Best Buy (NYSE:BBY )
This beleaguered electronics retailer has seen itsstock
more than double thisyear as an extended period of
quarterlyprofit shortfalls appeared to come to an end.
Best Buy had been steadily losing traction as its prices
were higher than online rivals such as
Amazon (Nasdaq: AMZN)
. In response, Best Buy has been slashing prices, which has
reduced gross margins but helped stabilize foot traffic.
Tooffset the lower gross profits, management has been
radically paringoverhead , includingsales staff.Note that
Best Buy'sbusiness model once depended on a knowledgeable
and friendly sales staff. Fewer salespeople means alot more
standing around for consumers, waiting to get their
questions answered (which has been my experience on recent
occasions). At some point in such an environment, shopping
online becomes the easieroption .
More to the point, this stock's rebound has eliminated any
sense of this stock being a value play. Shares now trade
for more than 10 times consensus fiscal 2014earnings per
) of around $2.40.
What's an appropriateearnings multiple for a retailer with
limited growth prospects and ever-deepening competitive
pricing pressures? "We believe that 8X is a reasonable
multiple given our view of the company's risk profile,EPS
growth trajectory, and recent low-quality earnings,"
saidanalysts at Citigroup, adding that they expect
shareswill fall to their $19price target .
Analysts at Merrill Lynch said, "While cost reductions
so far have been impressive and we believe there will be
more to come, we think these initiatives will be
insufficient to return earnings andcash flow to attractive
levels in the next few years." That view underpins an
$11.50 price target, which is less than half of the current
Chipotle Mexican Grill (NYSE:CMG )
Holy guacamole! This stock has risen more than $100 in just
six months, to a recent $370.
Thecredit goes to a string of impressive quarterly
results as last year's slowdown in profit growth appears to
have abated. Chipotle has topped profit forecasts by
exactly 16% for four straightquarters .
Investors may see a smooth ride to higher profits, as
EPS is expected to rise roughly 20% in 2013, 2014 and again
in 2015, when this company will be earning $15 a share,
according to analysts at Citigroup.
Yet that view may prove to be too optimistic. Goldman
Sachs analysts think sales growth will start to decelerate,
partially due to the fact thatsame-store sales , which used
to rise at a high-single-digit year-over-year pace, are now
growing half as fast. And they think that Chipotle's heady
expansion is leading to oversaturation in some markets,
noting that recently opened stores aren't generating the
initial traffic results that store openings used to
And Goldman's analysts think that as Chipotle enters a more
mature growth phase, the stock price will be impacted. "We
do not believe in-line growth is likely tosupport a
superior multiple, as was the case in CMG's hyper-growth
heyday. As such, multiple contraction may serve to offset
thecompounding EPS base, limiting shareholder returns over
the next few years." They see shares falling $50 from
current levels to a $320 target price.
H&R Block (NYSE:HRB )
Shares of this tax preparation service have risen more than
50% this year on hopes that the imminent major changes in
health care stemming from theAffordable Care Act will
makepersonal income taxes so complex that consumers will
flock to H&R Block for help.
But will that really be the case? After all, tax prep
volumes for the season just ended were down 0.9% compared
with a year earlier for H&R Block, mirroring pressures
seen by Intuit
. Additionally, in the past few years, this industry has
evolved into a slowly growing, maturemarket .
What impact will the Affordable Care Act have? Well,
there is sure to be some confusion around its
implementation. Many consumers are likely to need help
figuring out which health care subsidy they should receive,
or what health care taxes they might owe.
In response, the U.S. government is planning a major PR
blitz later this year to inform and educate consumers,
including explicit tax information. So it's probably too
soon to expect any bump for H&R Block and Intuit.
Risks to Consider:
As anupside risk, these stocks each has a short interest that
is equivalent to at least two days' tradingvolume , and rising
stock market could squeeze them higher.
Action to Take -->
Thesebull market stocks appear to have been lifted by the sense
that troubles in 2012 have been replaced by blue skies ahead in
2013 and beyond. Yet such a sunny view should invite caution, as
the fundamentals underpinning each of these stocks'gains appear
to be on shaky ground.
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